DIY Investor Magazine
/
July 2016
27
Brexit Impact on European Equities
John Bennett,
Henderson Europe Focus Trust
Risks and Opportunities; What it
all Means for Lowland Investment
Company
Laura Foll, Deputy Fund Manager
Having been cautious on markets all year, we
approached the referendum with a defensive posture
with large weightings in healthcare as well as the
recently built exposure to oil majors. This positioning
was based on fundamentals and not because of any
prescience about the outcome of the vote.
I expect Brexit to be nothing like as bad for the world
as the sensationalist media likes to portray, although
the truth is we are in uncharted waters and nobody
knows. We have therefore made no strategic changes
to the portfolios since the result because, if anything,
the uncertainty fostered by the Brexit result aligns the
market more closely with our thinking.
It would be damaging for British and EU negotiators
to rush a solution when participants are emotionally
charged. However, markets despise uncertainty
and confidence may be shaken as events drag on,
leading to investments postponed, jobs withdrawn and
consumption deferred. Our biggest concern, is that the
vote catalyses a European recession.
If there is a recession, it need not affect markets
in a uniform fashion. We would expect larger cap
companies and non-cyclicals to do better. Similarly,
sectors where valuations have already suffered a bear
market such as the oil sector are likely to be supported.
We began buying the oil sector in the third quarter of
2015 and in recent weeks our portfolios have benefited.
European markets suffered deeper falls in the initial
panic than the UK market and in a seemingly cruel
irony of Brexit, having retained its own currency, strain
in the UK can be partially relieved through a weaker
pound, boosting exports and the translated overseas
earnings of UK companies. No such relief valve exists
for individual members of the Eurozone and this fuels
our second concern – that Brexit precipitates a return to
crisis in the Eurozone periphery.
There will be heightened uncertainty in the short term
as the implications for underlying companies are
worked out. The impact will be different company by
company – some international companies (such as
AstraZeneca) will, we think, see little impact other than
the effects of currency moves while others will see their
environment change more markedly.
Approximately 70% of FTSE 100 sales are derived
outside of the UK, so the UK is a very international
market and companies with a competitive product
positioning and strong balance sheet should remain
well positioned over the long term.
I am less inclined to worry about the UK and to be
more concerned about Greece, Portugal and Italy
where electorates are similarly disillusioned because of
their challenged economies; Italy holds a referendum
in October on political reform and France appears
permanently disillusioned.
